In his Daily Market Notes investment strategist Louis Navellier sums up key themes for 2021 and 2022.
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
The big story for 2021 has been that inflation has spun out of control, which was sparked by (1) the ban on drilling on federal land, (2) the port bottlenecks and (3) the Fed pumping too much money in the U.S. economy. Although a federal judge overrode the Biden Administration’s federal drilling ban, the Energy Department remains hostile to independent energy, so the production of both crude oil and natural gas in the U.S. has ebbed. The ultimate insult was that many independent operators abandoned natural gas wells in the Permian Basin, especially in Southeastern New Mexico, so tons of natural gas and methane have needlessly escaped into the atmosphere, which is not what the climate activists wanted. Part of the proposed Build Back Better Act are several hundred million dollars to cap these abandoned wells. The Energy Department could simply honor the federal judge’s ruling, reactivate these wells, stop the leakage and help get energy prices lower with increased supply.
The good news is that in a roaring inflationary environment, residential real estate and stocks remain the best way to protect yourself against inflation, so both growth stocks and dividend growth stocks are expected to remain an oasis for investors. Millions of new investors have opened brokerage accounts since investors are increasingly turning to stocks to protect themselves against the highest inflation in 39 years (since 1982).
The net result is that 2021 has been a great year for stocks, but the financial media continues to try to scare investors by pointing out that Elon Musk and other billionaires are selling a record amount of stock and insinuating that if the “smart money” is selling, then a stock market correction may be imminent. However, The Wall Street Journal also recently pointed out that in the third quarter, stock buybacks rose to $234.5 billion in the third quarter, which is an all-time record. This may explain why companies continue to post better than expected earnings since stock buybacks boost the underlying earnings per share.
As far as a correction being imminent, we already had it between November 26th and December 3rd, when the stock market overreacted to the Covid-19 Omicron variant as well as unnecessary fears of Fed tapering. Fortunately, the Treasury Department recently conducted successful Treasury securities and although intermediate yields rose slightly, the 10-year Treasury and other long-term bond yields remain remarkably stable. As an example, the Treasury Department sold $36 billion in 10-year bonds in the latest auction with foreign buyers accounting for just slightly less than 69% of all bidders. The bid-to-cover ratio was 2.43, which is very healthy, so the 10-year bond yield only rose slightly and has since fallen. Since there continues to be robust international demand for Treasury securities, it will allow the Fed to taper a bit more and further reduce its quantitative easing.
As we close out 2021, the U.S. dollar remains very strong as international investors increasingly invest in the U.S. since we have positive interest rates (versus flat to negative interest rates in Japan and Europe) and a strong currency. The ISM service index is at a record high, plus the ISM manufacturing index remains robust, so fourth-quarter GDP growth is shaping up to be one for the record books! Approximately half the sales for the S&P 500 are outside of the U.S., so a strong U.S. dollar will help to create record sales and boost earnings for multi-international stocks.
Looking forward to 2022, I expect that growth and dividend growth stocks will continue to prosper. First, although year-over-year earnings comparisons are becoming more difficult, so I expect the breadth and power of the overall stock market to become more narrow, which is good news, since our stocks have traditionally prospered in a narrowing stock market environment. Second, the Fed will remain accommodative despite raising key interest rates and reducing its quantitative easing. Third, inflation will decelerate, but remain above the Fed’s target rates throughout 2022. Fourth, the leadership of both the House of Representatives and the Senate is expected to change in the mid-term elections, so Wall Street will finally get the divided government that it craves. Finally, inflation will fall under a 3% annual rate in late 2022, which the stock market is expected to celebrate.
Overall, I expect that growth and dividend growth stocks will remain an oasis amidst the inflationary bubbles rolling through the U.S. and world economy. As other countries persist with draconian lockdowns due to Covid-19, here in the U.S. lockdowns are no longer politically possible, since everyone who wants a vaccine can get one. As an example, despite record hospitalizations in Michigan, the governor does not dare impose more lockdowns, since she is running for reelection. The simple fact of the matter is that the U.S. remains an oasis for capitalism compared to the rest of the world.
The pandemic accelerated technological change and boosted productivity in the U.S., so companies can make more money with fewer workers. Artificial intelligence (e.g., Nvidia), cybersecurity (e.g., Crowdstrike & Fortinet), 5G (e.g., Alphabet, Cadence Design System, EPAM Systems & Keysight Technologies), electric vehicles (e.g., Ford, Panasonic and VW Group) and the semiconductor industries (e.g., KLA Corporation & United Microelectronics) are leading this productivity miracle. As investors, we have a lot to be excited about. Growth and dividend growth stocks represent a critical path, silver lining to prosperity, and the independence that successful investors enjoy.